In the usual circumstance, we wouldn't be terribly interested in an unpublished -- and therefore not precedental -- opinion. But the U.S. Court of Appeals' opinion in Kerns v. Chesapeake Exploration, LLC, No. 18-3636 (Feb. 4, 2019) caught our attention because it involves "forced pooling," which this site describes this way:
At its most basic, pooling is the joining together or combination of small tracts or portions of tracts to create sufficient acreage to receive a drilling permit under applicable state spacing rules and regulations, and for the purpose of sharing the production from the pooled unit among the pooled interest owners.Often, pooling is done voluntarily. That is, interest owners agree to the benefits of the combined acreage. Most oil and gas leases contain provisions allowing the lessee to pool the acreage covered by the lease; sometimes this right is virtually unlimited.At times, however, there are unleased mineral interests which makes voluntary pooling impossible. In such a case, many states (but not all) provide for “statutory” or “forced” pooling whereby unleased mineral interests are combined, even without the consent of the mineral interest owner. The policy behind forced pooling is that a mineral interest owner who refuses to enter into a lease should not be permitted to forestall development and production of the oil and gas resources.
In short, those property owners who don't want to participate in oil and gas exploration (including fracking) on their land are forced to do so, on the theory that they can't stand in the way of their neighbors exploitation of their properties.
We've been following that issue and its takings aspects because one of our students in last fall's William and Mary property rights class wrote about forced pooling for his final paper (which was really good, and I'm hoping that he pursues publishing it as an article).
In Kerns, property owners who were forced into forced pooling under Ohio's statute sued in federal court alleging a § 1983 violation, claiming a taking (both lack of public use, and a denial of compensation), and violation of their due process rights. The District Court rejected their claim, and the Sixth Circuit panel affirmed.
The most interesting part of the opinion starts on page 9. While we recommend you read the short opinion in its entirety, here are the highlights in which the court focused on the "property" interests at stake:
- The opinion acknowledged that under Ohio law, property owners generally have rights in the minerals below the surface.
- But Ohio law also recognizes "correlative" rights, the right of an owner to exploit oil and gas without needless waste. Slip op. at 10.
- The court pointed to other states, which have universally concluded that forced pooling is not a taking of a property owner's mineral rights. Slip op. at 11.
- Next, the court concluded that Ohio's regulation of oil and gas rights is a proper exercise of the state's police power. Slip op. at 12 ("That power is exercised in the service of protecting property rights by requiring a just, orderly, and efficient process for neighbors to extract common resources. Each landowner’s property interest in the minerals remains intact; it is simply regulated.").
- Thus, no taking of the subsurface minerals.
- As for their separate argument that forced pooling takes their property by physically occupying their subsurface land by horizontal drilling and leaving fracking waste behind, the court concluded that the "mere presence of waste" wasn't enough. Slip op. at 13 ("But alleging a party's mere presence below the ground is not enough to make out a takings claim," because "Ohio's actual-interference requirement means that the landowners' property interest in the space beneath their land springs to life only if Chesapeake's drilling 'actually interfere[s]' with their 'reasonable and foreseeable use of the subsurface.'").
The court's analysis leaves us less than satisfied:
- We thought physical invasion was enough, and that damages -- are not an element of a property owner's federal physical takings claim, no matter how state law defines the property. Did we miss something from Kaiser Aetna and Loretto? The wrong in physical invasion cases are the loss of the right to exclude, one of those fundamental property rights which cannot be defined away without compensation, right?
- The opinion sort of blew by the private takings argument in the property owners' claim. If the statute is designed to benefit those neighbors who want to exploit their own subsurface oil and gas -- but are prevented from doing so by the holdout owners -- does the statute make the correct findings as required by Midkiff to show a rational basis public use? The court did not address that question.
- Thus, we think the focus of the analysis should have been more on the compensation question: if the purpose of the physical invasion is public, is the compensation which the property owners receive under the forced pooling statute sufficient?
Will there be more? As we noted above, the questions these type of cases present have not really been analyzed well. So yeah, maybe more coming.
Kerns v. Chesapeake Exploration, LLC, No. 18-3636 (Feb. 4, 2019) (unpub.)
